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  • 1. The war ondisengagement: helpinginvestors avoid creatingthe future they fearTim Noonan, Managing Director, Russell Investments FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR DISTRIBUTION TO CURRENT OR POTENTAIL INVESTORS.
  • 2. Important Information Please remember that all investments carry some level of risk, including the potential Copyright Russell Investments 2012. All rights reserved. This material is proprietary loss of principal invested. They do not typically grow at an even rate of return and may and may not be reproduced, transferred, or distributed in any form without prior written experience negative growth. As with any type of portfolio structuring, attempting to permission from Russell Investments. reduce risk and increase return could, at certain times, unintentionally reduce returns. Russell Investment Group is a Washington, USA corporation, which operates through Diversification and strategic asset allocation do not assure profit or protect against loss subsidiaries worldwide, including Russell Investments, and is a subsidiary of The in declining markets. Northwestern Mutual Life Insurance Company. No investment strategy can guarantee a profit or protect against a loss. Russell Financial Services, Inc., member FINRA, part of Russell Investments. These views are subject to change at any time based upon market or other conditions First Used: September 2012 and are current as of the date at the top of the cover page. RFS-12-9186 The information, analysis and opinions expressed herein are for general information only. Nothing contained in these materials is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of an investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Russell Investments does not sell bonds or annuities.2 FINANCIAL PROFESSIONAL USE ONLY
  • 3. Helping bring about change INSTITUTIONS ADVISORS INVESTORSp.3 FINANCIAL PROFESSIONAL USE ONLY
  • 4. The ambienceRaj Rajaratnam Bernie Madoff Allen Stanford Rajat GuptaImage source: Peter Foley/ Bloomberg Image source: Jin Lee/Bloomberg Image source: Joe Image source: Spencer Platt/ Skipper/Reuters Getty Images Standard Chartered Image source: Park Ji-Hwan/AFP/Getty ImagesEmilio BotinImage source: Denis Doyle, Bloomberg Barclays Image source: Spencer Platt/Getty Images p.4 FINANCIAL PROFESSIONAL USE ONLY
  • 5. The ambienceThe customer is more cynical andmore distrusting of corporateAmerica than ever before. That is why Ibelieve that building a brand today ismore complex. Because people dohave more choices. A brand mustbe a bridge of trust to theconsumerYou have to recognizethat the success of Starbucks, or anycompany or brand, is not anentitlement. It has to be earnedevery day. - Howard Schultz, p.5 Starbucks Chairman Source: Context Magazine, Aug/Sep 2001
  • 6. Helping advisors to help clients Russell received 1st place for Demonstrates integrity and honesty in the Advisor Brandscape survey in 2011 Source: Russell Investments, data as at January 2011.The ranking shown here does not pertain to specific mutual funds referenced in this presentation. The ranking is based on responses from a representative cross-section of 1,643 registered financial advisors to an online survey conducted between April 15 and May 9, 2011. Of the nine Tier 1 loyalty drivers, Russell ranked firstin this category. Other categories did not produce the same results.Source: Cogent Research Advisor BrandscapeTM 2011: Measuring the Impact of Brand and Loyalty on Revenue in the Advisor Marketplace. Page 64. p.6 FINANCIAL PROFESSIONAL USE ONLY
  • 7. What does rich mean today? c c Image courtesy of Tibetan Nuns Project, www.tnp.org Book cover image courtesy of Wiley Finance. This book is an individual achievement and not done in conjunction with my role at Russell.p.7 FOR ADVISOR USE ONLY.
  • 8. The human capital trade (economist version)Source: Russell Investments 8 p.8 FINANCIAL PROFESSIONAL USE ONLY
  • 9. The human capital trade (human beings version)p.9 FOR ADVISOR USE ONLY.
  • 10. Clients are hiding from risk. Households willingness to take investment risk 8 11 9 5 5 Substantial risk for substantial gain 16 10 17 19 22 Above average risk for above 31 average gain 37 41 Average risk for average gain 35 39 12 7 5 8 Below-average risk for below- 6 average gain 42 31 30 24 30 Unwillingness to take risk Tim Noonan than Tim Noonan All Younger 35 to 49 50 to 64 65 or Older TitleHouseholds Title 35 Age of household survey respondent Number of respondents 3,000 912 740 805 534Source: ICI Commitment to Retirement Security, Investor Attitudes and Actions (p. 29), data as at January 2012. Percentage of U.S. households by age andownership status, Fall 2011. 10 p.10 FINANCIAL PROFESSIONAL USE ONLY
  • 11. Heres how. Combination of changes to be more financially conservative Shifted investments to be more conservative Increased regular savings amount 22 15 32 6 10 5 10 Delayed taking retirement or increased expected retirement ageSource: ICI tabulation of GfK OmniTel survey data (November and December 2010). Percentage of households owning financial investments* that increased theirregular saving, shifted their investments to be more conservative, or increased their retirement age, Fall 2010.*Households owning financial investments include households owning DC accounts, IRAs, or other financial assets (e.g., stocks, bonds, mutual funds, variableannuities).Note: Among the 2,039 households owing financial investments, 1,186-or 58%-made at least one of the actions indicated. See Appendix II for the exact wording of thequestions. 11 p.11 FINANCIAL PROFESSIONAL USE ONLY
  • 12. We return to a program previously interrupted 1 Consistent 2 Sustainable 3 Flexiblep.12 FINANCIAL PROFESSIONAL USE ONLY
  • 13. No magic bulletCurrent offerings and challenges Flexibility Sustainability Consistency Annuities immediate & variable (subject to the claims paying ability of the issuing insurance company) Bond Ladders Systematic Withdrawal (from traditional portfolios/ dividend paying stocks)p.13 FINANCIAL PROFESSIONAL USE ONLY
  • 14. Expand the Frontier (with Adaptive Asset Allocation) 70% 60%Surplus (as % of initial wealth) Conditional Asset Adaptive Allocation Asset Allocation 50% Traditional (Static) Static Asset 40% Asset Allocation Allocation 30% 20% 10% 0% 0% 2% 4% 6% 8% Shortfall Risk (Probability Magnitude of Failure) 65 year-old couple 10 year liquidity horizonThis hypothetical example is for illustration only and is not intended to reflect the return of any actual investment.Investments do not typically grow at an even rate of return and may experience negative growth. 100% survivorship income p.14 FINANCIAL PROFESSIONAL USE ONLY
  • 15. New A, B, Cs Three Key Funded Ratio Zones 6,000,000 5,000,000 Highly-funded Funded Ratio > 150% 4,000,000 Wealth Target Market Funded Ratio = 3,000,000 100% to 150% Under-funded 2,000,000 Funded Ratio < 100% 1,000,000 - Annual Retirement Income ($)Source: Russell Investments. Hypothetical example is for illustration only and is not intended to reflect the return of any actual investment. p.15 FINANCIAL PROFESSIONAL USE ONLY
  • 16. Spending policy Asset allocation Option value of annuitization deferral advances Lessons Hyperbolic discountPersonal asset liability model p.16 FINANCIAL PROFESSIONAL USE ONLY
  • 17. 17 FINANCIAL PROFESSIONAL USE ONLY.
  • 18. The battle of the hyperbolic discountSecret weapon: funded ratio The funded ratio provides an objective measure of where your client stands now Surplus Current Desired Investments Lifestyle Spending* Funded Assets Ratio = Liabilities Pension Income* Essential Spending* Social Security* Assets Liabilities (Spending Goals) *Discounted present valuesp.18 FINANCIAL PROFESSIONAL USE ONLY
  • 19. Helping advisors realize which problems can be solvedThis hypothetical example is for illustration only and is not intended to reflect the return of any actual investment. 19p.19 FINANCIAL PROFESSIONAL USE ONLY
  • 20. Spending policy Asset allocation Option value of annuitization deferral advances Lessons Hyperbolic discountPersonal asset liability model p.20 FINANCIAL PROFESSIONAL USE ONLY
  • 21. Cost of desired lifetime immediate annuity relative to portfolio value Expected Ending Wealth ($) but theres a good Annuity Purchase Cost or chance it never will You dont want the portfolio to fall below the annuity cost . Time to have a discussion with client 65 70 75 80 85 90 95 100 105 110 Age Annuity Cost Portfolio Balance Portfolio Balance Portfolio Balance (good markets) (mean return) (bad markets)IMPORTANT: This chart is for illustrative purposes only. The projections or other information generated by Russell regarding the likelihood of various investment outcomesare hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.Source: Russell Investments p.21 FINANCIAL PROFESSIONAL USE ONLY
  • 22. Preserving the option to annuitize can help balance retirees need for income and liquidity while managing longevity risk Cost of Lifetime Immediate Annuity Relative to Portfolio Value You dont want the portfolio to fall below the annuity cost $ Surplus Simulated annuity cost Shortfall 65 70 75 80 85 90 95 100 105 110 Age Annuity Cost Portfolio Balance (average return)IMPORTANT: This chart is for illustrative purposes only. The projections or other information generated by Russell regarding the likelihood of various investmentoutcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.Source: Russell Investments p.22 FINANCIAL PROFESSIONAL USE ONLY
  • 23. Spending policy Asset allocation Option value of annuitization deferral advances Lessons Hyperbolic discountPersonal asset liability model p.23 FINANCIAL PROFESSIONAL USE ONLY
  • 24. 24 p.24 FINANCIAL PROFESSIONAL USE ONLY
  • 25. Helping advisors engage the disengaged Its not what you say, its what they hear. Maslansky RELEVANT REALISTIC RESPONSIVE 1 2 3 Financial Planning Retirement Income Expertise Personal- ization Strategic Tactical Lifestyle Tailoring vs. Adaptability (Not Retirement) Goals-Based Planning NavigationMaslansky Research conducted by Russell Investments in February 2011 25 p.25 FINANCIAL PROFESSIONAL USE ONLY
  • 26. Rule of thumb distribution rules are bad advice Consider three investor scenarios Scenario 1 Scenario 2 Scenario 3 Age 67 67 80 Assets $1,250,000 $2,500,000 $620,000 Annual Spending* $50,000 $100,000 $50,000 Withdrawal Rate** 4.0% 4.0% 8.0% Estimated Liability $1,063,863 $2,127,726 $529,855 Funded Ratio 117% 117% 117%*With a 2.5% annual cost of living adjustment.**Based on current assets and first years spending.See the methodology section at the end of the presentation for more information. p.26 FINANCIAL PROFESSIONAL USE ONLY
  • 27. 27 FINANCIAL PROFESSIONAL USE ONLY.
  • 28. Wealth matters, but not as much as timeWill I ever be rich? 2011 2014 2016 2018 2020 OFF OFF ON ON ON TRACK TRACK TRACK TRACK TRACK 66% 93% 114% 139% 168% Tim Noonans funded ratio, as of October 2011.p.28 FINANCIAL PROFESSIONAL USE ONLY
  • 29. The ambienceThe customer is more cynical andmore distrusting of corporateAmerica than ever before. That is why Ibelieve that building a brand today ismore complex. Because people dohave more choices. A brand mustbe a bridge of trust to theconsumerYou have to recognizethat the success of Starbucks, or anycompany or brand, is not anentitlement. It has to be earnedevery day. - Howard Schultz, p.29 Starbucks Chairman Source: Context Magazine, Aug/Sep 2001
  • 30. Methodology The value of a spending liability is calculated by actuarially discounting future liabilities back to the present using mortality data and an appropriate risk free rate (often based on the Treasury yield curve). The Funded Ratio (FR) is the current portfolio balance divided by the liability value. FRs of 100% mean that the discounted liability exactly matches the current assets. Less than 100% means that a plan is underfunded. Mortality data comes from the Society of Actuaries, U.S. Annuitant 2000 Table. Discount rate assumptions Year 1 5 10 20 30 50 Rate 0.14% 0.89% 1.98% 2.94% 3.20% 3.38%30 FINANCIAL PROFESSIONAL USE ONLY.
  • 31. Russell, Russell Investments, Russell 1000, Russell 2000, and Russell 3000are registered trademarks of the Frank Russell Company. www.russell.com